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New Zealand cuts benchmark rate to record low

Thursday, March 10, 2016 - 06:47

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New Zealand's central bank slashed interest rates to a record low in a surprise move on Thursday, citing the country's struggling dairy industry and a deteriorating global outlook.

[WELLINGTON] New Zealand's central bank slashed interest rates to a record low in a surprise move on Thursday, citing the country's struggling dairy industry and a deteriorating global outlook.

The move - the fifth reduction since June last year - cuts the bank's benchmark rate to 2.25 per cent from the 2.5 per cent set in December, which was itself a record.

Analysts had expected the Reserve Bank of New Zealand to adopt a wait-and-see approach after its recent activity but it instead adopted a hawkish tone, warning there could be more cuts to come.

"Further policy easing may be required... we will continue to watch closely the emerging flow of economic data," Governor Graeme Wheeler said in a statement.

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Westpac economist Imre Speizer said his interpretation of Mr Wheeler's remarks was that there would be one more cut in June, then rates would settle at 2.0 per cent for a time.

The New Zealand dollar plunged 1.10 US cents to 66.70 US cents in the wake of the announcement.

New Zealand, the world's top dairy exporter, has been hit by a slump in global milk prices as rivals, particularly in the European Union, ramp up production.

The country shipped NZ$11.5 billion (S$10.8 billion) of dairy products in 2015, accounting for 17 per cent of total national exports.

But the giant farming cooperative Fonterra this week cut the price it pays for milk solids to a nine-year low of NZ$3.90 per kg, less than half the NZ$8.65 paid at the height of a China-driven dairy boom two years ago.

The Reserve Bank said the outlook for global growth had also deteriorated, amid weakness in China and Europe, as well as increased volatility on financial markets.

Mr Wheeler was also troubled by pessimistic expectations about inflation, which was just 0.1 per cent in 2015, well below the bank's target of 1.0-3.0 per cent.

"This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes," he said.

ANZ Bank said rates could go as low as 1.75 per cent by September 2017, noting: "The recent shift down in inflation expectations does appear to have spooked the RBNZ somewhat."

Finance Minister Bill English on Wednesday downplayed the impact of the dairy industry's difficulties on the broader economy, saying it continued to grow at 2.0-3.0 per cent.

AFP

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